Cash Flow Management

For Growth
By
Ron Bernstein

Agenda
I.

Profit and Cash are NOT

the Same
II. Monitoring Cash Flow
with Ratios
III. Link Between Growth
and Cash
IV. Operating Tactics for
Maximizing Cash Flow

MEET U.S.

Sources & Uses of Cash

Income Statement and Balance
Sheet can be both
Sources & Uses of Cash

Investors Equity
Lenders Liabilities
Operations
Profit Income Statement
Working Capital Balance Sheet

Assets
Property, Plant & Equipment
MEET U.S.

Typical Cash Flow Young Company

Sources of Cash
Investors Equity
Lenders Liabilities

Uses of Cash
Investment Purchase Equipment
& Facilities - Assets
Operations
Losses Income Statement
Working Capital Purchase Material &
Increase Receivables Assets

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Typical Cash Flow Growth Company

Sources of Cash
Operations Profit
Lenders Additional Debt
Investors Additional Equity
Uses of Cash
Investment in Fixed Assets
Operations Working Capital

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Typical Cash Flow Mature Company

Sources of Cash
Operations - Profit
Uses of Cash
Investors Dividends
Lenders Repay Debt
Minimal Cash Flow In/Out
Investment/Sale of Fixed Assets
Operations Working Capital
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Typical Cash Flow Company in Trouble

Sources of Cash
Sale of Fixed Assets
Lenders (maximize borrowing)
Investors (as much as investors
are willing or able to invest)
Uses of Cash
Operations Losses
Operations Increased Working
Capital (Out of Control)
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What Have We Seen So Far?

Profit Is Only One Component

of Cash Flow
MEET U.S.

Profit versus Cash an Example

Profit and Cash are NOT
the same
Cash paid when product is produced 1-3
months before shipment (sale)
Cash received 1-2 months after product shipped
Profit (Revenue Expense) recorded at time of
shipment
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Conclusions from Our Example

Cash Profit

Cash
CashIs
Isneeded
neededto
to
provide
provideWorking
Working
Capital
Capital
Profit
Profitis
iscalculated
calculated
before
beforecash
cashis
is
received
received
Monthly
Monthlyoperating
operating
costs
costsreduce
reducecash
cash
Ignored
Ignoredpossible
possiblecash
cash
from
fromlenders
lendersor
orinvestors
investors

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What Is Working Capital?

Money needed to fund
the daily operations
of the company

Accounts Receivable
Inventory
Accounts Payable
Accrued Expenses Payable

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Working Capital Affects Cash

Cash Will INCREASE If:
Collect (reduce) Receivables
Reduce Inventory
Increase Accounts Payable
Increase Accrued Payables

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Working Capital Affects Cash

Cash Will
DECREASE If:
Increase Receivables
Increase Inventory
Reduce (Pay)
Accounts Payable
Reduce (Pay)
Accrued Payables

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Formula for Working Capital

Working Capital represents
a need for Cash.

(+) Accounts Receivable

(+) Inventory
(-) Accounts Payable
(-) Accrued Payables
= Working Capital
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Tools for Monitoring Cash Flow

Ratios
Days Sales Outstanding
Inventory Turnover
Accounts Payable Days

MEET U.S.

Days Sales Outstanding

Measures the number of days
required to collect on a sale

Determine Average
Sales/Day
Sales for last 3 months
Number of Days in last 3 months

Divide Receivables
Balance by Average
Daily Sales
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Days Sales Outstanding

Lower is better (generally)

If Invoice Payment Terms are Net
30, Days Sales Outstanding < 45
Days is GOOD
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Inventory Turnover
Measures the number of times
per year material moves through
inventory

Divide Cost of Goods Sold by

Ending Inventory Balance

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Inventory Turnover

Higher is better
Manufacturing Company:

2 = poor
4 = average
6-8 = good
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Accounts Payable Days Outstanding

Measures the number of days
required to pay a typical vendor
invoice

Determine Average Purchases/Day

Cost of Goods Sold for last 3 months Number of Days in last
3 months

Divide Accounts Payable Balance by

Average Daily Purchases
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Accounts Payable Days Outstanding

A high figure Trouble!

If Vendor Terms = Net 30, then Accounts
Payable Days should be < 40 Days
If A/P Days > 60 Days, Vendors see a problem
and may cut off credit

MEET U.S.

Ratio Analysis
Analyze the ratios
Are the values excellent,
average or poor?

Analyze the trend

Look at a series of
calculations of the same ratio
at different periods of time
Is the trend getting better or
worse?
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Growth and Cash Flow

Growth Requires
Cash
Addition
al
Inventor
y

Additiona
l
Equipmen
t&
Facilities

Additional
Receivabl
es

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Growth and Cash Flow - Lessons

Growth requires cash

Projections identify cash
needs
Ratios help in making
projections
Plan ahead!

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Strategies & Tactics to Maximize Cash Flow

CASH IS KING

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Strategies & Tactics to Maximize Cash Flow

Communicate!
Form a Committee from
each operational area
Revise department plans if
necessary
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Strategies & Tactics to Maximize Cash Flow

Purchasing
Cancel or delay Purchase
Orders for parts not
needed
Arrange extended
payment terms
Return/sell obsolete parts
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Strategies & Tactics to Maximize Cash Flow

Marketing and Sales

Delay marketing efforts until ready for
production
Focus on selling products that can be
shipped (and be paid for!) now

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Strategies & Tactics to Maximize Cash Flow

Cash collections
Call customers when their
receivable is 35 days old
Immediately resolve any
issues that customers
have
Hold shipments to
customers who are late
paying previous invoices
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Strategies & Tactics to Maximize Cash Flow

Vendor payment
Pay vendors by priority:
1-Government
2-Employees
3-Utilities
4-Sole Source Vendors
5-Repeat Vendors
6-One-time Vendors
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Strategies & Tactics to Maximize Cash Flow

Project dates to pay for each invoice

Communicate that date when asked
Pay the invoice on the promised date!
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Strategies & Tactics to Maximize Cash Flow

Engineering
(Research and Development)

Concentrate on quick shipment projects

Focus on completing new designs
Minimize Engineering Changes many
additional costs

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Strategies & Tactics to Maximize Cash Flow

Manufacturing
Produce products that can be shipped
immediately
Minimize Work In Process

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Summary

Profit Cash
Monitor and project Cash Flow with
ratios
Growth requires cash
Projecting cash needs for growth is
important
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Conclusion

Managing operations to maximize Cash Flow

reduces the likelihood of a Cash Crisis

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